How FTSE 100 shares could provide £12,169 of passive income in retirement!

Markets can go up and down. But over the long term, UK share markets have a great track record of providing terrific passive income.

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Investing to make a healthy passive income in retirement has never been more important. A combination of high inflation and soaring social care costs has made it increasingly hard for people to make ends meet.

This is why the number of over-70s in the UK in work has rocketed. According to Rest Less — a platform that offers lifestyle and work advice to older people — says 280,000 men in this age group remain in the workplace today. That’s up significantly from the 176,000 recorded in 2012.

Why investing matters

Inflationary pressures are expected to ease from the second half of 2023. Yet the financial constraints on retired Britons will remain high even as price rises at the checkout start to moderate. 

Indeed, the number of pensioners struggling to survive was soaring long before the cost-of-living crisis erupted. Research from Professor Bernhard Ebbinghaus of the University of Oxford before the pandemic showed that one in 20 of over-65s were in “severe poverty”. That was up from fewer than one in 100 during the mid-1980s.

The State Pension has grown weakly over the past decade. And it’s a problem that’s tipped to worsen as the country’s elderly population balloons. Planned rises in the pension age already illustrate the problem the government faces to balance the books.

Funding retirement with FTSE 100 shares

But taking action early enough could help me avoid any financial trouble. In fact, regular investing gives me a chance to not just survive in retirement. I could make a very healthy passive income once I finish work for the last time.

I have chosen to invest in UK shares to build cash for retirement. This is because the stock market has a great track record of paying above-average returns.

The FTSE 100, for instance, has provided an average annual return of 8.92% since its inception in 1984, according to IG Group. That’s thanks to a blend of capital appreciation and dividends that would be reinvested.

This is far higher than the low-single-digit returns investors in a cash savings account can expect to make. And it means that even those who are late-ish to the party could make a decent sum of money with UK blue-chip stocks.

Let’s say that a 50-year-old who has £500 to invest a month in FTSE shares. If they can achieve that proven 8.92% rate of return they would, by the time they reach 70, have made an impressive £304,219.

£12,169 in annual passive income

This is thanks to the mathematical miracle called compounding. It means I can make money on my initial investment as well as on any dividends I reinvest. And it can supercharge the amount of passive income I might make when I retire.

If I applied the 4% withdrawal rule, that £304,219 I’d have made would provide me with an annual income of £12,169. Pulling out just 4% each year would provide a decent passive income and ensure that my retirement portfolio lasts decades.

I’ve packed my own Stocks and Shares ISA with many popular FTSE 100 shares. These include insurance giant Legal & General, drinks manufacturer Diageo and household goods business Unilever. And I plan to continue buying large-cap UK stocks like these to build long-term wealth.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has positions in Diageo Plc, Legal & General Group Plc, and Unilever Plc. The Motley Fool UK has recommended Diageo Plc and Unilever Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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